Chapter 3 - Acquiring and Organizing Management Information

Question 1

Purpose and Use of Records

Answer 1

• Measure profit
• Provide data for business analysis
• Assist in obtaining loans
• Measure profitability of individual enterprise
• Analysis of new investments
• Prepare income tax returns

Question 2

Farm Business Activities - Production Activities

Answer 2

• Activities related to the production of crops and livestock

Question 3

Farm Business Activities - Investment Activities

Answer 3

• Relate to the purchase, depreciation, and sale of long-lived assets, such as land, equipment and livestock

Question 4

Farm Business Activities - Finance Activities

Answer 4

• Relate to borrowing money and paying the interest and principal on loans.

Question 5

Account Payable

Answer 5

• An expense that has been incurred but not yet paid.

Question 6

Account Receivable

Answer 6

• Revenue for a product that has been sold or a service provided but for which no payment that has yet been received.

Question 7

Accrued Expense

Answer 7

• An expense that accrues or accumulates daily but not yet been paid.

Question 8

Asset

Answer 8

• Any item of value, tangible or financial

Question 9

Credit

Answer 9

• An entry on the right-hand side of a double entry ledger. Used to record a decrease in the value of an asset or increase in a liability / owner’s equity.

Question 10

Debit

Answer 10

• An entry on the left-hand side of the double entry ledger. Used to record an increase in an asset or decrease in a liability / owner’s equity.

Question 11

Expense

Answer 11

• A cost or expenditure incurred in the production or revenue.

Question 12

Inventory

Answer 12

• The physical quantity and financial value of products produced for sale that have not yet been sold.

Question 13

Liability

Answer 13

• A debt or other financial obligation that must be paid in the future.

Question 14

Net Farm Income

Answer 14

• Revenue minus expenses.

Question 15

Owner equity

Answer 15

• The difference between business assets and business liabilities.

Question 16

Prepaid Expense

Answer 16

• A payment made for a product or service in an accounting period before the one in which it will be used.

Question 17

Profit

Answer 17

• revenue minus expenses minus opportunity cost.

Question 18

Revenue

Answer 18

• The value of products and services produced by a business during an accounting period

Question 19

Accounting Period

Answer 19

• A period of time used to summarize revenue and expenses and estimate profit. Either calendar year or fiscal year.
• Generally recommended that a a firm’s accounting period follow the production cycle of major enterprises.

Question 20

Chart of Accounts

Answer 20

• Lists and organizes all accounts used by the accounting system
• Includes the individual sources of income and expense that you are interested in tracking.

Question 21

Single vs. Double Entry

Answer 21

• Amount of entries made
• Double entry records
  changes in values of assets and liabilities
• In double-entry, there are equal and off-setting entries for every transaction.
• Double-entry requires more effort but is more accurate

Question 22

Whole Farm vs. Enterprise

Answer 22

• If the farm produces multiple products, it is helpful to know which ones contribute the most to profitability
• Dividing the business into individual enterprises or profit centers
  provides valuable information

Question 23

Basic vs. Complete

Answer 23

• The most basic accounting system is one that is very simple and uses cash accounting.
• A complete system would be computerized with
  capabilities for both cash and accrual accounting

Question 24

Cash Accounting Basics

Answer 24

• Revenue: recorded when and only when cash is received
• Expenses: recorded when they are paid
• Advantages: simple and easy-to-use.
• Disadvantages: recorded revenues and expenses may not be accurate

Question 25

Basics of Accrual Accounting

Answer 25

• Revenue: recorded when the item is produced.
• Expenses: “matched” to revenue; recorded when used to produce
• Advantage: accurate.
• Disadvantage: requires more time than cash system

Question 26

Primary Financial Statement and their Key Elements

Answer 26

Revenue - Net income - Assets - Production

Expenses - Investments - Liabilities - Investing

Profits - Withdrawals - Equity - Financing